How to Buy a House from a Foreclosure Auction

Getting a great deal on houses is a key to my real estate investment strategy. The tricky part is finding the great deals, especially in a hot market like we have in Colorado. In the last few months our median price has increased by over 10 percent and over 30 percent in the last two years. Buying a house from a foreclosure auction is one way to get a great deal, but it comes with risk. Auctions tend to have less competition because they have stricter requirements for buyers and many times you cannot inspect the house or even see the inside of it before buying. I have bought many houses from auctions over the years and made money on many, but also lost money on a few.

Why can you get good deals on houses from foreclosure auctions?

The less people you have to compete with when buying a house, the better chance you have of getting a great deal. Many times auction companies will have strict criteria for buying their houses.

Cash purchases: Many auctions require the buyer to pay cash for houses they bid on. Foreclosure auctions may require the buyer to have cash the same day they bid or before they bid on a property.

No inspections: Many auctions do not let buyers inspect a house after they bid on it, like most traditional sales would. In some cases a house may be occupied and the buyer cannot inspect the interior until they buy. I am buying a house now that is occupied and I have never seen the interior. If the house is occupied, you can’t just kick out the occupant. You have to evict them or possibly honor their lease if they have one.

Non refundable earnest money: When you buy a house you have to submit earnest money to the seller. If your financing falls through or you find a problem in your inspection you usually get your earnest money back. With an auction property you will usually not get your earnest money back if you back out of the contract for any reason.

Short notice: Some state foreclosure sales give buyers very little time to know what houses will be bid on and how much the starting bids will be. Other online auctions will give the buyers weeks notice before an auction. In Colorado we are given the sale list for properties two days before the sale.

Clear title: Many foreclosure auctions do not guarantee clear title. There is no guarantee you are even bidding on the first loan.

All of these factors make it tough for most buyers to purchase homes from auctions. The majority of house buyers are owner occupants who need to get a loan. Most investors also need a loan to buy a house and auctions that require cash eliminate those buyers as well. Many buyers are scared of auctions because of the possibility of losing earnest money, no inspections and other issues. That usually leaves the experienced investors to battle over houses at auctions. The experienced investors know how much they can pay for houses that come with all this risk and still make money. Some online auctions are less risky than foreclosure auctions, which can provide opportunities for less experienced buyers.

How does the foreclosure auction work on Colorado?

There are many different types of real estate auctions that come with varying amounts of risk. The riskiest are the local foreclosure sales, because they require the quickest payment with the least amount of due diligence available. Every state has different laws regarding foreclosure auctions, which will make it very tough for inexperienced buyers. Make sure you know your local laws before bidding!

A foreclosure auction gives the general public a chance to buy homes that are being foreclosed on by the lien holder. Before the lien holder can take possession of the house through a foreclosure, they have to offer it up for auction. The bank or lien holder will make a starting bid, which may be what is owed on the loan including late fees and interest. The bank can also start the bidding at less than what is owed.

If no one bids on the home at the foreclosure sale, the house will go back to the bank. However, investors or even owner occupied bidders can buy houses at the foreclosure sale if they bid more than the banks bid (assuming the bank isn’t bidding as well, which is possibly). I used to buy most of my fix and flips at the foreclosure sale in Colorado and I even bought a personal residence at the foreclosure sale. We stopped buying at the foreclosure sale last year, because competition has increased, pushing prices too high. I can get a better deal on the MLS than I can at the foreclosure sale in my area.

Here is how the foreclosure sale works in Colorado:

Pre-sale list is published every Monday afternoon, which lists the properties going to sale and the starting bid.

The foreclosure sale is on Wednesday morning at 10 AM. You can call the public trustees office on Wednesday before the sale to see if any properties you are interested in are still going to auction.

The auction is conducted at 10 AM and all bidders must register before the auction in person at the public trustee office. The auction is live and goes very quickly.

The winning bidders must sign a form and have until noon on Wednesday to come back to the office with a cashier’s check for the full amount of the bid. If the winning bidder does not show up, the second highest bidder is notified and given a chance to buy the property at their highest bid.

There is a short redemption period for junior lien holders in Colorado that lasts at least 10 days. A junior lien holder can redeem the property by paying off the first bid amount plus interest in full.

In Colorado there is no guarantee you are bidding on a first loan or you will get a clear title. In the day (Tuesday) before the sale we would get an O and E (ownership and encumbrance report) from the title company, check out the house as much as we could and then decide if it was worth bidding on the home.

What are the foreclosure laws in other states?

The process for buying at the foreclosure sale I outlined is only the process for Colorado. Other states have much different laws and each states handles their auctions differently. Here are a few differences I have heard of.

Some states require proof of funds before the auction. This requires bringing cashiers checks for the amount of money you want to bid.

Some states give much less notice of what houses will go to the sale and what the bids will be. I have heard some areas only have hours to research properties before they are sold.

Some states have owner redemption periods, which means the owner of the home has a period of time to pay off whoever bid at the sale and get the house back. Some states have redemption periods as long as 6 months!

Make sure you know exactly how the foreclosure auctions work in your state before you bid. When I used to go to our foreclosure auctions I used to see many new investors check out the auctions for weeks to see how they worked. I have also seen new investors bid on a second loan assuming it was a first loan before.

How did I lose money on houses I bought at the foreclosure sale?

I have made a lot of money from houses we bought at the foreclosure sale, but I have also lost money because of the nature of the auction.

On one deal we had the winning bid on a house at the foreclosure auction. We had an O and E that showed we were bidding on a first position note and we viewed the home before the sale. We looked through the windows and the house appeared to be completely vacant. After winning the bid we found out the previous owners filed a lawsuit against the bank claiming the bank foreclosed wrong. The lawsuit had not been recorded yet and we had no way of knowing about it. In the end the lawsuit was thrown out, but it took the judge one year to look at the case and we had to hold the property that entire time. After interest and carrying costs we ended up losing money.

How can anyone buy a house without seeing the inside of it first?

In many instances I had to buy a house without seeing the interior buy a house that was occupied. There are no open houses or showings when you buy a house at the foreclosure sale. Some investors will try to get into homes before the sale, but if caught it is trespassing and could be breaking and entering as well.

I also tried to talk to the occupants before the sale to get as much information as I could. This is not a fun situation to be in, when trying to talk to someone about buying their house they are losing to foreclosure. Most people are actually friendly and will at least tell you if they are renting or if they own the house. Many times they have no idea how the process works and you can build report by telling them how it works and what the timelines are.

Foreclosure auctions versus online REO auctions

This article has been about foreclosure auctions that the banks use to complete the foreclosure process. There are many types of auctions, and some banks use another auction to sell the house once they have completed the foreclosure. HUBZU, Homesearch, Auction.com and many more sites have auctions for REO properties that the bank already owns. These auctions have much different terms than the foreclosure sales and are much easier to buy from.

I plan to write a more detailed article on the other types of auctions, but for now know that each site has different terms and procedures. Even the same site can have different terms for different properties going to auction. These sites will also sell houses occupied and make the winning bidder be responsible for evicting or coming to other terms with the occupants.

Conclusion

Buying a house at the foreclosure auction can be very scary and very risky. I stopped buying because the prices increased to a point where the risk was no longer worth the reward. The inventory of foreclosures in Colorado has dropped significantly and I think investors who counted on the foreclosure sale for inventory had to increase the prices they pay, because they know of no other way to buy. I would not rule out buying from the foreclosure sale, but I would also make sure you have multiple ways to get great deals as the market changes.